WHEAT AND CORN OUTLOOK
George A. Shumaker, PhD
Professor, Ag & Applied Economics
University of Georgia
Prepared for
2003 Southern Regional Outlook Conference
September 29 – October 1, 2003
Atlanta, GA
1
WHEAT OUTLOOK
Global Wheat Situation
The gap between global use of wheat and production has widened resulting in a draw
down in global wheat carry over stocks. Lower U.S. spring wheat production, crop
shortfalls in both Argentina and Australia along with relatively strong demand from
traditional wheat importing countries all have contributed to the reduction in wheat
ending stocks. These are the primary factors behind the rise in wheat prices over the last
two years and given the level of stocks, price should remain relatively strong for at least
one more year. The high plains area of the U.S. has very dry conditions heading into the
planting season and unless moisture levels improve during the winter, we can expect
lower hard red production in the U.S. next spring. This implies that a solid bottom exists
in the market and the potential for volatility remains high.
GLOBAL SUPPLY & DEMAND
Production
Use
End Stocks
700
Million Metric Tonnes
600
500
400
300
200
100
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2003 Crop Plantings and Production
U.S. wheat plantings for harvest during 2003 totaled 60.9 million acres, up from 60.1
million acres in 2002 according to the September, 2003 USDA crop report. That was the
2
U.S. Wheat Acres
Million Acres
Planted Acres
Harvested Acres
90.0
85.0
80.0
75.0
70.0
65.0
60.0
55.0
50.0
45.0
40.0
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
second consecutive year of increased wheat plantings following six years of declines.
Acres for harvest as grain totaled 52.7 million acres, up a remarkable 6.9 million acres
from such a slight increase in plantings. Much of that increase is due to a rebound in
harvested acres in the southern plains where abandonment was unusually high last year.
The increase in harvested acreage bucks a five year trend in declining harvested acres.
Growing conditions were generally excellent across the nation as indicated by the record
high national average yields of 43.5 bushels per acre.
U.S. Wheat Yields
50.0
45.0
Bushels Per Acre
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
1976
1979
1982
1985
1988
3
1991
1994
1997
2000
2003
The wet weather during much of the growing season in many parts of the country
fostered vegetative growth that produced multiple large seed heads. The only negative
concerning the crop was that wet conditions continued into the harvest period resulting in
some low test weights and sprouting.
Total U.S. production is pegged near 2.29 billion bushels, up sharply down from the 1.62
billion bushels harvested in 2002 due both to the higher yields and increased harvested
acreage. That is the highest total production figure recorded in four years.
Total available wheat supplies for the 2003 marketing year will be up nearly 16 percent
from a year ago at 2.864 billion bushels. Carry in stocks were very tight this year at 492
million bushels versus 772 million bushels a year ago. The increase in supplies will
allow for greater use this year compared to last year when tight supplies limited off take.
U.S. Wheat Total Supply
Carry In
Production
4,500
4,000
Million Bushels
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Projected Use for Wheat
Total wheat use from the 2003 marketing year is expected to rise from 1.98 billion
bushels to 2.22 billion bushels. Only domestic mill use is expected to decline from year
ago levels, down 25 million bushels to 910 million to create a three year down trend.
4
Exports are projected to rise sharply from 860 million bushels to 1.05 billion bushels
reversing a four year declining trend. Smaller global supplies and a weaker dollar versus
other currencies will make U.S. wheat attractive. Feed use of wheat will also increase
from a record low of only 102 million bushels fed last year to a still low, by historical
standards, 175 million.
U.S. Wheat Use
Domestic Mill Use
Exports
Seed
Feed
3,000
Million Bushels
2,500
2,000
1,500
1,000
500
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
0
Ending Stocks and Prices
Wheat ending stocks will rise and will likely be near 644 million bushels, but will be at
the 2nd lowest level since the 1996 crop year. The stocks-to-use ratio would be near 29%,
meaning that stocks represent 29 percent of annual use. The 644 million bushels in
projected stocks is a bullish level and may lead to price improvement during the
marketing year. Stocks-to-use ratios can be used as a predictor of prices due to the very
strong inverse relationship the ratio has to season average price. Using the following
chart we can conclude the season average price received by farmers should be near $3.25.
WHEAT PRICE vs STOCK-USE RATIO
$5.00
95
$4.50
96
$4.00
$3.50
94
92 93
91
$3.00
'02
'03 97
'01
90'00
$2.50
98
99
$2.00
$1.50
$1.00
$0.50
$0.00
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
5
30.0%
35.0%
40.0%
45.0%
That compares favorably with the range of prices provided by USDA of between $3.10
and $3.50 per bushel. That is down slightly from year ago levels but still attractive
compared to the previous five year’s average price. Given current cash prices, it is
unlikely there will be a deficiency payment available for the crop this year.
Price vs Stocks-to-Use Ratio
Price
Stocks-to-Use Ratio
$5.00
120.0%
$4.50
100.0%
$4.00
80.0%
$3.50
60.0%
$3.00
40.0%
$2.50
20.0%
$2.00
0.0%
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
The Future
Wheat production has declined in importance in the Southeast in recent years given
changing cropping patterns and weak prices. However, since wheat is a crop produced
by many nations around the world production can quickly respond to changes in price. It
is likely we will see some expanded wheat acreage not only in the U.S. and here in the
Southeast, but in other producing nations as well in response to improved prices.
One aspect of the decline of wheat, and other grain production as well, in the Southeast
has been the loss of country grain handling facilities. Losing local buyers means losing
purchaser competition in the market place as well as increased hauling costs to the
producer. An ongoing cooperative study of basis patterns for wheat in Georgia and South
Carolina has found that wheat basis has weakened by as much as 18 cents per bushel as a
result of loss of buying points and other structural changes in the wheat markets of those
two states. The average weakening of the basis was about 7 cents per bushel over the last
six years.
The New Farm Bill provides price support levels for wheat. The loan rate for the 2004
crop years is about $2.80 per bushel but it varies by county. The price threshold at which
there would be no Counter Cyclical Payment is $3.34. That is very near the mid point of
the range of potential season average prices issued by USDA. So, if the supply – demand
6
scenario plays out as described in this article, there would be little or no CCP for the 2003
wheat crop.
FEED GRAIN OUTLOOK
GLOBAL SITUATION
Global production of course grains has not kept pace with off take for the last five years.
As a result ending stocks have been drawn down each of the last five years. The stocksto-use ratio is now at the lowest level since 1995 and just about one-half of the 2000 crop
year level. Increased demand from China has had a major impact on use while relatively
short U.S. crops in recent years along with drought in Europe this year have contributed
to the short supply.
GLOBAL COURSE GRAIN SUPPLY & DEMAND
Production
Use
End Stocks
1000
900
Million Metric Tonnes
800
700
600
500
400
300
200
100
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
DOMESTIC SITUATION
The U.S. supply demand situation is also quite tight. According to the September SUDA
Crop Production Report, U.S. farmers planted the same acreage to corn this year as last
(79.1 million acres) but are projected to harvest 2.6 million acres more than last year
(71.8 million acres). Improved growing conditions this year versus last year in the
eastern corn belt, south and mid-south will account for most of the added harvest acres.
7
U.S. CORN ACREAGE
Planted
Harvested
90.0
85.0
Million Acres
80.0
75.0
70.0
65.0
60.0
55.0
50.0
45.0
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
40.0
Yields
U.S. national average corn yields are projected to be 138.5 bushels per acre. If these
yields do occur, they would be just off the record of 138.6 bushels per acre set in 1994.
The high yields come about because of generally very good weather across much of the
corn belt and excellent grain growing weather across the mid-south and southeast.
Several states in those latter areas will set new yield records. Areas with less than ideal
conditions lay to the west of the Mississippi River where hot and dry conditions may trim
yields.
An interesting phenomenon exists this year with respect to yields. As our collegue Steve
Riggins at Kentucky pointed out to me, even though we are flirting with national average
yields near record levels, it is possible that this year we could actually see yields falling
below the trend line for the second consecutive year. According to Dr. Riggins, the last
time that happened was back in 1975 and 1976. But in the years since then we have not
seen yields fall below the trend line for two years in a row.
Total Supplies
Beginning stocks as of September 1, 2003 were just about 1 billion bushels and the
lowest amount since 1996. We ended last year with a stocks-to-use ratio of 10.5% also
the tightest since 1996. Production this year is currently projected to be near 9.94 billion
bushels, up 936 million bushels compared to last year but just under the record of 10.1
billion bushels produced in 1994. The 9.94 billion bushels to be harvested this year
8
exceeds use during the past marketing year and should allow for expansion of off-take
this year.
U.S. Corn Yields
150.0
140.0
Bushels Per Acre
130.0
120.0
110.0
100.0
90.0
80.0
70.0
60.0
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
U.S. Corn Total Supply
Production
Carry In Stocks
14,000
10,000
8,000
6,000
4,000
2,000
9
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
0
1977
Million Bushels
12,000
Prospects for Demand
Within the September USDA Corn Supply and Demand report, they project total off take
to be record large at 9.9 billion bushels. USDA is predicting a drop in feed use from 5.7
billion bushels to 5.625 billion bushels due to an expected decline in Grain Consuming
Animal Units. While there is likely to be modest gains in the both the poultry and hog
sectors, those gains will not make up for the expected drop in the fed cattle numbers. As
of August1, 2003, the cattle on feed number was down about 5 percent from last year and
down 12 percent compared to two years ago when the record for feed use was set.
The loss in use in feeding will be more than off set by gains in both exports and domestic
food/seed/industrial sectors. The current USDA projection is for a 200 million bushel
increase to 1.8 billion bushels in export sales compared to last year. Japan is our largest
customer for corn and is likely to buy more this year than last. Mexico, especially since
NAFTA, is our second best buyer and also is projected to buy more this year.
Competition for exports comes from Argentina and China and current estimates are they
both will have smaller crops this year and thus may not export as much as previously
believed. The dollar is also weaker this year against most foreign currencies and that
makes our corn a bargain compared to some sellers.
The GMO issue still needs to be addressed if we are to return to the export levels we
enjoyed during the middle of the 1990s. The Starlink problem still haunts some buyers
and other nations simply have not yet accepted GMO products as safe despite all
evidence to the contrary.
USDA is projecting an increase in food/seed/industrial uses of 165 million bushels, a rise
of 7.1 percent, if it comes to pass. Total use in this category is projected to be 2.475
billion bushels. It appears this major use category has clearly surpassed exports as the
second most important market for corn. Last year, use in this category rose by 256
million bushels with the largest share of that going to ethanol production. There have
been several ethanol plants come on line in the last two years with more yet to be
completed. Existing plants have also expanded capacity. Increased energy costs and a
strong drive to increase domestic production of all fuel sources are strong supporting
factors. A total of 1 billion bushels of corn (over 10 percent of production) will be
converted to ethanol during the current marketing year.
Total off take will be a record 9.9 billion bushels if the USDA projects hold true. The
implicit assumption is that the higher prices this demand will generate will not choke off
any potential use. Time will tell if this is true or not.
10
U.S. Corn Usage
Feed Use
F. S.& I.
Export
10,000
9,000
Million Bushels
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
FOOD, SEED & INDUSTRIAL USE OF U.S. CORN
HFCS
Glucose
Starch
Ethnaol
Beverage
Cereal,Other
3000
2000
1500
1000
500
03
02
20
01
20
00
20
99
20
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
11
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
19
80
0
19
Thousand Bushels
2500
Ending Stocks and Season Average Price
At the end of the marketing year, it appears we will end up with stocks very close to
where we started the year, that is right around 1 billion bushels. I like to use the Stocksto-Use Ratio as a way of looking at the relationship between stocks and prices. Given
that there will be a very small change in the Ratio 10.8 percent for this year versus 10.5
last year, one can conclude that the season average price this year should be very similar
to last year. USDA make prices projects by giving a range of potential price outcomes.
Their range for this year is from $2.10 to $2.50. The mid-point of that range, $2.30,
might be considered the price closest to the likely season average. Last year’s season
average price was $2.30.
When this data is plotted in a different fashion we have an interesting finding. Note the
“top” trend line in the following diagram. It represents the trend relationship between
season average prices and Stocks-to-Use Ratios during 1990-1998. Now note the
“bottom” trend line that represents the trend relationship between season average prices
and Stocks-to-Use Ratios during1998-2003. In effect, what we have observed is a
decline in the relative importance of stocks as a season average price determinant over
the last few years. My feeling is that the emergence of production of corn in other
countries around the world has made the U.S. stocks position less important in price
determination that it once was. That is not to say this relationship is not important, it is
just less so than previously.
U.S CORN PRICE vs STOCKS RATIO
$3.50
95
$3.00
96
$2.50
93
"02
97
94
91
"03
$2.00
"01
$1.50
90
98
99
92
"00
$1.00
$0.50
$0.00
0.0%
5.0%
10.0%
15.0%
12
20.0%
25.0%
30.0%
Final Observations and Marketing Strategies
It appears we have finally moved out of the sub $2.00 price range we were in for the four
years of 1998-2001. During that period supply and demand we pretty much in balance as
production average 9.653 billion bushels while total use averaged 9.671 billion bushels.
The average production last year and this is 9.475 while total use will average 9.755
billion bushels. We can conclude from this that only a small change in either supply or
demand can have a pretty significant impact upon price.
One way I go about answering the question “Should I sell now or wait?” is to use
the following diagram. The Projected Price line in the chart represents the seasonal
tendency of December corn futures “fitted to the actual January average of December
futures”. The Actual Price is the monthly average price of December futures up to this
point in time. When the Actual is greater than the Projected, then the market is providing
a more “favorable” price than would be expected and the converse is also true. So, the
answer I would provide is that we can get more now for our corn now than I would have
projected and the tendency over the next two month is for weaker prices.
RELATIVE CORN PRICES
Projected vs Actual
Projected Price
Actual Price
$2.45
$2.40
$2.35
$2.30
$2.25
$2.20
$2.15
$2.10
$2.05
$2.00
$1.95
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
However, marketing strategies are very case specific. For grower in areas where the
basis strengthens significantly from harvest into the storage season, storage can be an
effective strategy to follow. In cases where the basis does not show much strength after
harvest, returns to storage must be generated from futures market spread or gain. In there
current market (Sep. 15) there is an 8 cent spread Dec to Mar, an added 4 cents spread
Mar to May for a “paper” return of 12 cents to hold from now until March. Any futures
gain on top of that would be added returns to storage. Of course, there is no guarantee
that futures will not fall and that is a big part of the risk of unpriced storage.
13
It is possible that there could be a modest LDP in some parts of the region at or shortly
after harvest if the local supply swamps local demand. If an LDP occurs, the wise grower
will claim it on any unsold corn. The chances for a Counter Cyclical Payment remains
iffy but there could also be a modest CCP if prices do sag under harvest pressure and
farmers sell a good portion of the crop under price duress. However, the threshold at
which a CCP is triggered is a season average price of $2.32 which is real close to the mid
point of the USDA price range.
14